Hard Money - As an investment

I've been exploring hard money lately and how it works in relation to development.

If a development needs funding now, and gains this through hard money - The return on that money for an investor could be 100% over an 18 month period.

Hard money could be used upfront to fund an option fee, DA and consultancy fees. It could also be used toward the build. This gives investors access to cash on cash returns.

What I'd like to know is has anyone invested in supplying hard money? Or capital raising for the hard money and receiving a fee?

I'd love to speak with someone who understands the industry, the regulations, risks and benefits.

 

This is basically a syndicate..
X number of investors put in say $200k, agree on 15% return pa on their cash (pending risk issues).
Then there are options of receiving the cash back.
All at the end
Some after year 1 balance at end
Or convert their funds into one of the units in the development if they choose to.
Plethora of issues to consider and I have oversimplified it, but it is a common thing.

 

Anyone offering 100% over 18 months is desperate. The only occasions I've heard of where developers are chasing money at a non-institutional/"pro" level (e.g. banks, PE funds, developer mates) have resulted in punters buying into the developer's sunk cost fallacy & everyone ends up in tears. In both the scenarios I can think of, it was further complicated.

I mean have a think about it.. if Someone can't:
1. Loan / line of credit / redraw against their own assets
2. Get whoever is backing the overall development to release a bit more cash
3. Borrow from industry pros who are experienced at doing risk and situation evaluations
4. Borrow from family, friends and associates

And are so out of options they are chasing random hard money lenders at highly lucrative / predatory (depends on perspective) terms.
Do you really want to stack your chips up behind theirs and hope they make the right decisions?

EDIT: unless we're talking really small time stuff, like your mate Garry wants to do a subdiv and build on the new block, but in those scenarios it doesn't really make sense to me vs just buying and doing your own project / the $$ isn't there to make it worthwhile with a multi person split.

 

I've got a feeling you wouldn't be allowed to loan them money, or rather they wouldn't be allowed to take the loan from you unless you qualified as a sophisticated investor. I could be wrong though.

 

I'm a sophisticated investor, I have bought some sophisticated wines before (just maybe I shouldn't have drunk them).

 

Is there such a thing as a sophisticated rum drinker?? Because I'm probably one of those

 

Kraken Rum

 

I dont really see it as viable.
Most hard money lenders want security in anycase, so will take security over the property.
Then charge huge fees and interest rates. Ive heard of some billing at 18%pa and others at 2%/month.
And even then many will still only lend at 70-80%LVR.

If you can still make a development work at these levels, and fund the interest - surely you can find some other way to finance the deal.

As a borrower Im not sure I would want to take the risk of borrowing funds from an unregulated lender.

Blacky

 

Yes.

• One who can spell "Bundaberg" not just 'Bundy'.
• Drinks it with something other than coke
• Another use is cooking.

 

Thanks for your feedback.
My understanding is this is run much closer to the structure of a syndicate. Basically- in this case it's a 60 unit development.

The developer has the land under option. The hard money lender has come in and said "I'll be your JV partner- we can split the profits 60/40"

Then the hard money lender looks for investors - of their 40% share- 60-70% of this goes back to the investors securing their 200% return. The rest goes to the hard money lender themselves. They are willing to split their portion of the commission 50/50 with anyone that brings an investor into the deal.

On a deal with $5mil profits the numbers stack up quite well...

 

What specifically are the issues to consider?

 

My understanding is it's very common to use mezzanine finance in large developments (the one I'm exploring is 60+ units) - The main reason for this being the ability to borrow above 65% as well as the private lenders appetite to view end value as opposed to existing value of the development.

Paying a 50-100% return on an investors money (all capitalised until the end of the development) is usually still a heap cheaper than bringing a JV partner into the deal who will expect a minimum of 40% of the profit share.


In the setup I'm exploring, myself and the hard money lender would be the JV money partner, demanding a 40% return of PROFIT - This in turn would allow us to offer a 150% return on the investors money and still see some nice profits ourselves.

Exploring this concept is purely hypothetical at the moment. The concept and the exposure to this size of development is new. I'm simply trying to understand a market I didn't realise existed!

 

I know the industry is not regulated by APRA - however there are checks and balances in place. In the scenario I mentioned the hard money lender is the one with the experience- I would simply be referring to them. Also, the investor would be seeking their own independent legal advice.

It's something I'd be keen to explore putting my own cash into as well as raising capital for.

My exposure to the concept is new and I'm trying to understand it a little clearer as I see great opportunity for returns, ways to mitigate risks (ie- smaller amounts of money across multiple developments with experienced developers), yet much higher risks than the asset classes I'm used to - Well most of them anyway!

 

So you're basically the middle man who finds a syndicate of investors who can pool enough funds to enable the developer to get a bank loan. How does the system work if more funds are required throughout the project?

 

Now if you were in the US you could quite easily become the hard money lender to just about anyone, dictate your terms sort of.

Problem in US at the moment - economy improving and now people have jobs etc. but their credit score/rating is stuffed...due to the meltdown they had in 2007

 

Good question- In this scenario the hard money lender also has access to private lending (The stuff that is charged at 18%) - In a project expecting a $5 mil profit- With an unexpected expense of $1mil this is split evenly amongst both parties. However.... From the 40% that the hard lender is sharing with the investor - the hard lender will usually take the hit. This creates a buffer protecting the investor. The hard money lender may walk out with $300k instead of the expected $750k with the same result for the person who found the capital.

The same is true of the project runs better than expected. The investor keeps the 150% return and the hard lenders profits are drastically improved.

The hard lender reviews the feasibility and runs it past a QS before deciding to take on any deal. I'm only interested in partnering on ones where the hard lender is also putting some of their own cash in as well like the one I've come across now.

 

This should say 50% return. They get their money back plus 50% in this scenario